The new Amazon offer to Hachette

I was at 8,000 feet on a mountain hike in Colorado when a reporter called my cell phone, told me about Amazon’s latest “offer” to “resolve” the dispute with Hachette, and asked for my reaction. My first thought was, “wow, what a brilliant move by Amazon and it seems, at first, like a win all around.” I might have heard this wrong, but I think the reporter was under the impression at that point that Hachette would accept the offer. That was wrong, and so was my first reaction.

What Amazon proposed was that instead of paying Hachette its normal (and presumed 70%) cut of ebook sales, Amazon simply pay the authors 100% of the proceeds. That ostensibly has both sides just giving up its margin and having the authors get more. Seems a reasonable temporary compromise, until you do the math. I didn’t do it on the mountain, but I’ve done it since.

It’s a terrible deal for Hachette; one they can’t possibly accept. And most of their authors, if they were honest, would admit they couldn’t benefit so much from it either.

What the deal elides — as does almost all the “analysis” about how authors fare with big publishers versus how they fare with Amazon — is “unearned advances”. For the biggest authors with the biggest sales of print and ebooks, Hachette has already paid the ebook royalties at more than the contractual “25% of publisher revenue” rate.

So we have a $10 ebook. Normally, Amazon would pay $7 to Hachette and keep $3. Hachette would notionally divide the $7 as $5.25 to Hachette and $1.75 to the author. What Amazon proposed was that the author would get the whole ten dollars, Amazon would give up its $3 and Hachette would give up its $5.25. Not quite fair, and, to be honest, I hadn’t even done that math when I spoke to the reporter.

But the math is worse than that because Hachette has already paid the author’s $1.75 in the advance for the lion’s share of the sales that would be made under this deal if it were agreed to. So Amazon is giving up $3 and Hachette is giving up $7 on most of the books. And many of the authors, frankly, aren’t entitled to even their own share on those sales (they already got it), let alone Hachette’s (or Amazon’s).

It would already seem that Amazon holds the high cards here. They are apparently around 60 percent of Hachette’s ebook business. But Hachette’s ebook business is a smidgen of Amazon’s, almost certainly less than 10 percent. And the percentage of its total operating margin Amazon loses in the Hachette dispute is a fraction of the percentage of operating margin that Hachette loses, even before this latest gambit. From the outside, it would appear that Amazon’s “staying power” during this dispute was already much greater than Hachette’s.

This “offer” would further tilt that ground to Amazon’s advantage. It is a deal that Hachette couldn’t accept, but it makes Amazon look good to some authors, particularly to many of the indie authors who have never fully taken on board the “unearned advance” part of the author revenue piece. Since I came to the wrong quick conclusion, I find it easy to understand how anybody else could do the same thing.